Canada’s provincial health plans cover most medical expenses. However, there are expenses which are not covered like health and dental services. For these costs, many Canadians seek coverage by paying premiums in a private health insurance plan. It is important to know that these health insurance premiums (as well as any uncovered costs) can be deducted from your tax return using two methods, the Medical Expense Tax Credit (METC) or a Health Spending Account (HSA):
The Medical Expense Tax Credit (METC) is a non-refundable tax credit applied through your personal tax return. It works by taking the lower of 3% of your net income or $2,268 (2018 minimum threshold) and subtracting it from your eligible medical expenses. After, multiply this number to the lowest combined federal and provincial marginal tax rate in your province.
A Health Spending Account is a tax plan which allows an incorporated small business owner to turn their after-tax medical expenses into before-tax business expenses. Basically, it lets the business owner pay for medical expenses through their corporation. Contrary to popular belief, small business owners have the freedom to get cost control!
The premiums paid under a private health insurance plan are typically eligible in both the tax credit and a Health Spending Account. The CRA states that as long as a substantial amount of the private insurance plan covers eligible CRA medical expenses, than the plan premiums are eligible. By substantial, it means 90% or more.
In general, the METC is better suited towards individuals or families under financial distress; low income and high medical expenses. For your typical Canadian or small business owner, the credit will result in little to no tax savings.
As previously stated, the HSA works for both the health insurance premiums and also any medical expenses not covered by your insurance provider. Even your spousal insurance plan could qualify as an eligible expense under the HSA. The HSA can save thousands of dollars for small business owners.
The METC and HSA are two alternatives to reduce your personal medical expense costs. They both utilize aspects of tax planning. You cannot use both as that is “double dipping”. The size of the METC is dependent on your medical expenses, net income, and province of residence. In some cases, you may receive little to no tax credit at all. On the other hand, an HSA can eliminate 100% of the taxes on your medical expenses (make it tax-free!). It does this by turning after-tax personal medical costs into before-tax business deductibles. This process occurs through your business, which is why the plan only works for small business owners.
No, a Health Spending Account is not insurance. While it is in the “nature of insurance”, it is not insurance. Think of it as a tax plan which turns 100% of after-tax personal out of pocket medical costs into before-tax business expenses. It is an alternative to insurance.
Yes – an HSA is legal in Canada – as long as the guidelines are adhered to. To properly satisfy the conditions set forth by CRA, make sure you choose a reputable provider and understand what you are purchasing.
Note: A Health Spending Account only works for incorporated business owners, such as an incorporated contractor, Professional Corporations, or incorporated small business with arm’s length employees. There are more eligible businesses, these are just a few examples.